December 2024
Stephanie Pantaleo, CPA, MTax, CIM®
Vice President, Wealth Management and Family Office Services
In November, Pembroke released the estimates for the income and capital gain distributions for all of its funds, on a per unit basis (see the article Fund Distributions Overview [2024]). The purpose of publishing these estimates is to help investors assess how the fund distributions may affect their 2024 tax position, so that they can plan accordingly while there is still time in the year to do so.
However, it is important to first note that tax exposure from the distributions is only relevant to investors holding cash accounts. Funds that are held in registered accounts (for example, RRSP, RRIF, TFSA and FHSA) may still make distributions, but these distributions are received in a deferred/tax-free manner, given the nature of these accounts. Therefore, distributions will only have a tax impact on you if you receive them in a non-registered account.
In addition, we would like to note that the estimates provided are not final distribution figures. Trading activity in the funds after the estimate is determined may also affect these estimates.
What Are Distributions?
As most of Pembroke’s funds are structured as trusts, the net earnings of each fund are allocated to investors based on the investor’s proportionate holdings in the fund. For example, an investor that holds ten units of a fund with 1,000 units outstanding will receive 1% of the fund’s distribution of earnings.
The allocation of earnings by the fund to investors is called distributions. Distributions take two forms: income and capital gains—if applicable. Both are taxed annually at the investor’s appropriate tax rate.
In addition, distributions can be received by investors in one of two ways.
- By way of reinvestment of additional units in the same fund (or a different fund)—referred to as a distribution in-kind. For example, if a fund distributes $1,000 of income/capital gains to an investor, the investor will receive $1,000 worth of additional units.
- In cash. For example, if a fund that distributes $1,000 of income/capital gain to an investor, the investor will receive $1,000 in cash instead of additional units.
Distributions allocated to investors are taxed at their personal marginal tax rates, regardless of if the investor takes the distribution in-kind or in cash.
How Do I Calculate My Approximate Tax Exposure?
To estimate your potential tax exposure in 2024, multiply the number of units you hold in a particular fund by the estimated income per unit. This will yield the approximate addition to your taxable income in 2024, to which you will then need to apply your appropriate tax rate to evaluate the taxes payable on the distribution.
Let’s take an investor with a 53% tax rate who holds 2,500 units of the Pembroke Canadian Growth Fund. The estimated distribution of income on a per unit basis is $1.31495. Therefore, the investor will have an addition to their taxable income of $3,287 (2,500 units * $1.31495 per unit), giving rise to an approximate tax bill of $1,742 ($3,287 * 53% tax rate).
The same exercise can be completed for the estimated capital gain per unit. If you need any support, you can contact your Pembroke representative who will be happy to assist you with your 2024 tax estimates.
Further Considerations
- The final 2024 distribution figures will be found on the T3 slip (NR4 if you are not a Canadian resident) issued to you in the early part of 2025. The T3 slip will have a further breakdown of the type of income distributed to you (interest, dividend, foreign income, etc.), as each are taxed differently for Canadian tax purposes.
- You should consider your personal liquidity in order to fund the tax bill generated by the distributions. You may find it advantageous for you to receive the distribution in cash rather than in-kind to prepare for any tax payment. Speak to your Pembroke representative should you wish to receive your distribution in cash rather than in-kind.
- As mentioned earlier, the distributions represent income and capital gains allocated to you by a fund. Distributions are independent from any capital gains (or capital losses) that are triggered on the redemption of units, such as for the payment of management fees, cash withdrawals and other transfers. You may incur further taxes on any capital gains triggered by these redemptions.
- Some funds distribute income on a quarterly basis instead of an annual basis. Any distributions that have been made to you during the year are noted on your monthly/quarterly Pembroke statements.
A Note on Capital Gains
A discussion of taxes in 2024 would be incomplete without addressing capital gains tax. Earlier this year, the federal government proposed to increase the capital gains inclusion rate from 50% to 67% for gains/losses realized after June 24, 2024. For individuals and certain trusts, the 50% inclusion rate would continue to apply for the first $250,000 of net capital gains (i.e., capital gains less capital losses) in a given year.
For the 2024 year, the full $250,000 threshold would be available on net capital gains triggered between June 25 and December 31, 2024. Any unused portion of the $250,000 threshold would not get carried forward to next year.
For all other taxpayers, including corporate taxpayers, the $250,000 annual threshold would not be available. Thus, the 67% capital gain inclusion rate would be applicable on every dollar of net capital gains beginning June 25, 2024.
While this legislation has not yet been passed into law, taxpayers should remain aware of the potential change to the capital gains inclusion rate. For Pembroke investors, the capital gain inclusion rate changes would be applicable to both capital gain distributions by the funds and net capital gains triggered on the disposition of fund units.
Other Articles Of Interest
Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.